On being special in the venture business

Chris Douvos, one of the smartest fund-of-funds guys, once asked me the three questions he asks people who are raising a VC fund for the first time. The third was: “what makes you so special?”

I was stumped. I couldn’t think of an answer. I figured I’d come back to the process once I did. That was years ago.

I thought of that conversation recently. A company I invested in went public. I was enjoying my fifteen minutes of credibility, meeting with VCs, people with funds. VCs who had convinced someone they were special.

I meet with VCs all the time. I need to know who might be interested in doing the Series A for the seed-stage companies I invest in, or the Series Seed for the pre-seed ones. In the past months, with my current state of credibility, I sometimes meet with the Midas List kind of VC. In all of these meetings there comes the moment when they lean forward in their seat (they don’t always actually lean forward in their seat, but you know) and ask me “what makes you so special?”

Not necessarily in those words.

I don’t really like to sell myself. This was a handicap when I worked for others. It’s why I suppose I no longer work for others. I don’t like relying on someone else’s opinion of how I am doing. Especially when that’s what it is, an opinion. Venture capital you can quantify. You either do a good job (you make money) or you don’t (you lose money.) It’s not an opinion.

But just telling people the numbers doesn’t impress them. We all know that person who made 99 meh investments and then put a small check into…whatever, name a unicorn. Luck.

Me? My numbers are good. Top quintile. In fact, top quintile even after you take out the IPO. Clearly skill. My friend Dave once told me the difference between investment and speculation. “Speculation is when someone else is doing it,” he said. Luck is when someone else is successful. When you’re successful, it’s skill.

To others if you only have a what, it’s luck. Skill needs a how, because it’s only skill if you could do it again.

After being stumped by Chris I cycled through plausible-sounding explanations of how. I used them to answer the question. None of them impressed anyone. When I ran out of plausible-sounding explanations I started asking others the question, to see what they said. I was in turn not impressed, although they were generally better at selling their answer than I was.

Is there no how?

Some people have better investment results. Is it luck? Michael Mauboussin said you can tell skill from luck by asking yourself “can you lose on purpose?” This is an amazing question. In venture the answer is, trivially, yes.

There are two kinds of pitches. Those that are clearly bad ideas, and those where it’s not clear at all if it’s a good idea or a bad idea. Investing in the former will lose you money. Investing in the latter might lose you money or might make you money. Skill is distinguishing between the two. Then luck comes into play.

The reason I could never say how I’m special is because I’m not. And neither were any of the other VCs I met with. At least not in a way anyone could wedge into a 30-second pitch. Divvying the world into two piles is hard, but it’s not magic. Being special is being magic, that’s what the question is really, how are you magic?

Anyone can learn to invest well in startups. But you do have to learn how to do it and then you have to work hard to do it right, every time. Like any job, you show up and you do the work and you notice your mistakes and you try to do better and you improve over time. It requires thinking and trial and error and trying to be rational and asking yourself if you’re thinking about this right and asking other people how they did what worked and what they think about this one you’re thinking about. Figuring out the nos from the maybes is, more than anything else, like solving a puzzle. The puzzle is different each time. Your job is solving the puzzles.

Good puzzle-solvers have all sorts of strategies they use to solve puzzles, but the main way they become good puzzle-solvers is by solving puzzles. Good puzzles are never the same as other good puzzles. There is no generic puzzle solving process. If you ask a good puzzle solver what makes them so special, they would ask for a puzzle to solve, and solve it. What makes them special is that they solve the puzzles. They do the job.

I wanted to impress Chris, I don’t really need to impress VCs. If they think I’m lucky it’s as good as thinking I’m good. Lucky or good, same difference, they’ll take my introductions. So now when they ask what makes me so special, I tell them the truth: I’m not special, I’m just doing the job. It’s sort of underwhelming.

But funnily enough: when I say that to someone new to the business, they think I have no how; the meeting usually ends soon after. When I say it to the Midas List guys, that’s when the meeting starts; they recognize the only real how there is.

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